Environmental Audit

Encyclopedia of Small Business
COPYRIGHT 2007 Thomson Gale

Environmental Audit

Environmental audits are reviews of a company's operations and processes to determine compliance with environmental regulations. Audits cover buildings and building sites; activities and procedures; industrial and commercial developments; and engineering hazard and operability studies.

Environmental audits can be costly—but, conversely, failure to carry out such audits can have much more expensive, and sometimes prohibitively expensive, consequences. They are undertaken, for these reasons, when mandated by law or prudence. Two major types of audits are conducted: 1) site inspection related to buying and selling land and 2) operational audits carried out either voluntarily in order to avoid or reduce penalties or because they are mandated under law.

SUPERFUND ESAs

Small business owners are most likely to encounter environmental audits in the context of real estate transactions. In December 1980 Congress passed the Comprehensive Environmental Response Cleanup and Liability Act (CERCLA), better known to the general public as the Superfund program. Superfund legislation is aimed at controlling and cleaning up sites contaminated with hazardous wastes—and to pin the costs of clean-up on those who contaminated or own the site. Essentially, if a site is found to be contaminated, the landowner or operator (and other parties connected to the property) are responsible for environmental cleanup costs. This liability extends to the owner/operator even if the site was contaminated by previous owner/operators and, in most cases, even if the current owner/operator was unaware of the contamination.

Not surprisingly, owners of land wishing to sell it, potential buyers doing "due diligence" before buying a site, and lenders standing by to finance such deals have spent—or have caused to be spent—substantial amounts of money on environmental site assessments (ESAs). These are performed by environmental auditing companies (frequently small businesses); an ESA can ensure that a property is "clean." ESAs come in a modest and expensive versions known respectively as Phase I and Phase II. Phase I audits are based on documentation about the site's history to determine if it was ever used for manufacturing or waste storage. If not, good. If yes, Phase II. Phase II is expensive because it may involve actual soil and groundwater testing. Phase I audits begin at around $1,000 but may cost more if the property is large; Phase II audits begin at around $8,000 and go up from there.

SELF-POLICING AUDITS

The U.S. Environmental Protection Agency (EPA) has been operating a program under which regulated entities (companies and other institutions) voluntarily monitor their own compliance with environmental regulations and, if they find themselves in violation, report such breaches to the EPA. The EPA calls this program Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations. Regulations governing this program were issued by EPA in 1996 and then in revised format in April 2000.

The fundamental logic underlying self-policing is that it costs the agency much less money to ferret out offenders, to prove that violations have occurred (which may require extensive sampling and testing protocols), and to litigate cases in the courts. To achieve this cost—and potential environmental—benefit, EPA policy offers the regulated community special incentives to self-police: self-policing entities avoid substantial penalties for violations that they report; EPA foregoes referral of such volunteers for criminal prosecution; and EPA refrains from asking for audit reports from the entity to which it has a right under law.

Penalties assessed by EPA under environmental laws include two components. The first is the economic gain the company achieves by not controlling its pollution; the second component is based on the gravity of the offense, e.g., the amount of spillage or air emissions and/or the toxicity of the chemicals permitted illegally to escape. Under self-policing, all penalties based on "gravity" are cancelled if the polluter complied with all of EPA's rules in carrying out its audit. Seventy-five percent of gravity-based penalties are forgiven if the polluter complied with the rules but failed to have in place a systematic method of detecting violations. Penalties based on "economic gain" continue to apply.

To avoid penalties, the entity must meet nine conditions reproduced from EPA regulations as follows:

Systematic discovery of the violation through an environmental audit or the implementation of a compliance management system.

Voluntary discovery of the violation was not detected as a result of a legally required monitoring, sampling or auditing procedure.

Prompt disclosure in writing to EPA within 21 days of discovery or such shorter time as may be required by law. Discovery occurs when any officer, director, employee or agent of the facility has an objectively reasonable basis for believing that a violation has or may have occurred.

Independent discovery and disclosure before EPA or another regulator would likely have identified the violation through its own investigation or based on information provided by a third-party.

Correction and remediation within 60 calendar days, in most cases, from the date of discovery.

Prevent recurrence of the violation.

Repeat violations are ineligible, that is, the specific (or closely related) violations have occurred at the same facility within the past 3 years or those that have occurred as part of a pattern at multiple facilities owned or operated by the same entity within the past 5 years; if the facility has been newly acquired, the existence of a violation prior to acquisition does not trigger the repeat violations exclusion.

Certain types of violations are ineligible such as those that result in serious actual harm, those that may have presented an imminent and substantial endangerment, and those that violate the specific terms of an administrative or judicial order or consent agreement.

Cooperation by the disclosing entity is required.

EXISTING AUDIT AND DISCLOSURE REQUIREMENTS

Many corporate studies on environmental and safety issues, whether conducted internally (by employees) or externally (by outside consultants/experts under contract), must be disclosed to appropriate government agencies and the general public. For instance, companies are required to submit permit applications, emission reports, and other information to government agencies under the Clean Air Act, the Clean Water Act, and other environmental laws. The Federal Community Right to Know Act is another law that places specific obligations on companies. Under this law, firms are obliged to disclose the size, nature, and identity of storage and releases of toxic substances.

Companies also often engage in a wide array of other environmental and safety evaluations to assess cost and level of compliance. The practice of voluntarily checking compliance with environmental regulations through the practice of self-auditing has garnered considerable support from state lawmakers as well. As of 2000, environmental self-audits receive significant legal protections in 26 states. The body of law in these states maintains that companies can voluntarily test for violations and correct all previously undetected problems without legal penalty. Companies that report violations avoid financial penalties and receive additional time to rectify problems. Most significant of all, the results of self-audit tests and programs in these states receive significant legal protections from public disclosure.

Confidentiality privileges have been heavily criticized in some quarters. The Environmental Protection Agency (EPA), environmental groups, and other observers charge that environmental self-audit laws, when buttressed with secrecy protections, allow polluters to violate environmental statutes without suffering any adverse consequences. Detractors of secret audit privileges also contend that decreased visibility of environmental practices and decisions will produce increased "corner-cutting" in the realms of health and safety.

Supporters of increased audit secrecy privileges claim that increased confidentiality would actually encourage greater stewardship of the environment. Advocates say that if businesses do not have to publicly disclose information found in internal compliance studies—which might otherwise be used by as "roadmaps" by litigants in civil or criminal cases—the company's owners and managers will be more likely to engage in thorough studies of their true level of compliance with environmental regulations.

The EPA's own self-policing policy appears to straddle these positions—encouraging internal audits and providing incentives to conduct them but setting the rules for such studies and analyses and requiring disclosure.

Shaw, Jane S. "Business and the Environment: Is there more to the story? Evidence of good environmental stewardship is more extensive than most economists and executives recognize." Business Economics. January 2005.

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